Consolidation Working Paper Eliminations, Intercompany Merchandise Sales

Prance Athleticwear Company owns all of the voting stock of Stallion Shoes. Acquisition cost was $7 million in excess of Stallion's book value of $3 million, and the excess was attributed entirely to goodwill. As of the beginning of the current year, goodwill is impaired by $500,000. Goodwill is not impaired in the current year. Following is information on intercompany merchandise transactions between Prance and Stallion for the current year:

Intercompany profit in Prance's beginning inventory, purchased from Stallion, is $300,000.

Intercompany profit in Stallion's beginning inventory, purchased from Prance, is $400,000.

Intercompany profit in Prance's ending inventory, purchased from Stallion, is $200,000.

Intercompany profit in Stallion's ending inventory, purchased from Prance, is $250,000.

Total sales from Stallion to Prance, at the price charged to Prance, were $7 million.

Total sales from Prance to Stallion, at the price charged to Stallion, were $5 million.

Prance uses the complete equity method to account for its investment in Stallion on its own books. The separate trial balances for Prance and Stallion at the end of the current year are below.

(in thousands)Prance

Dr (Cr)Stallion

Dr (Cr)Current assets$2,500$1,500Plant and equipment, net350,000250,000Investment in Stallion12,050--Liabilities(353,300)(245,500)Capital stock(2,000)(1,000)Retained earnings, beginning(6,000)(4,000)Sales revenue(275,000)(150,000)Equity in net income(1,250)--Cost of sales200,00090,000Operating expenses73,00059,000Total$0$0

Required

a. Prepare a schedule calculating equity in net income for the current year, appearing on Prance's separate books ($1,250,000) and the end-of-year balance for Investment in Stallion, appearing on Prance's separate books ($12,050,000).

• Enter answers in thousands ($400,000 equals $400 in thousands).
• Use negative signs with answers that reduce net income and the investment balance.

(in thousands)Stallion's reported incomeAnswer

Confirmed profit in beginning inventoryAnswer

Unconfirmed profit in ending inventoryAnswer

Equity in net income$1,250

(in thousands)Acquisition costAnswer

Change in book value to the beginning of the yearAnswer

Goodwill write-off to the beginning of the yearAnswer

Unconfirmed profit in last year's ending inventoryAnswer

Investment balance, beginning of yearAnswer

Equity in net income, current yearAnswer

Investment balance, end of year$12,050

b. Prepare a working paper to consolidate the trial balances of Prance and Stallion. Label your eliminating entries (C), (I), (E), and (R).

• Enter answers in thousands ($400,000 equals $400 in thousands).
• Use negative signs with Cr (credit) answers in the Consolidated Balances Dr (Cr) column.

Consolidation Working PaperTrial Balances

Taken From Books

EliminationsConsolidated

Balances(in thousands)

Prance

Dr (Cr)Stallion

Dr (Cr)DebitCreditDr (Cr)Current assets$2,500$1,500Answer

(I-3)Answer

Plant and equipment, net350,000250,000Answer

Investment in Stallion12,050--(I-2)Answer

Answer

(C)Answer

Answer

(E)Answer

(R)Goodwill----(R)Answer

Answer

Liabilities(353,300)(245,500)Answer

Capital stock(2,000)(1,000)(E)Answer

Answer

Retained earnings, beg.(6,000)(4,000)(I-1)Answer

Answer

(E)Answer

Sales revenue(275,000)(150,000)(I-4)Answer

Answer

Equity in net income of Stallion(1,250)--(C)Answer

Answer

Cost of sales200,00090,000(I-3)Answer

Answer

(I-1)Answer

Answer

(I-2)Answer

(I-4)Operating expenses73,00059,000Answer

$--$--Answer

Answer